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Chapter 03 - The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential
CHAPTER 3
THE REPORTING ENTITY AND CONSOLIDATION OF LESS-THAN-WHOLLY-OWNED
SUBSIDIARIES WITH NO DIFFERENTIAL
ANSWERS TO QUESTIONS
Q3-1 The basic idea underlying the preparation of consolidated financial statements is the
notion that the consolidated financial statements present the financial position and the results of
operations of a parent and its subsidiaries as if the related companies actually were a single
company.
Q3-2 Without consolidated statements it is often very difficult for an investor to gain an
understanding of the total resources controlled by a company. A consolidated balance sheet
provides a much better picture of both the total assets under the control of the parent company
and the financing used in providing those resources. Similarly, the consolidated income
statement provides a better picture of the total revenue generated and the costs incurred in
generating the revenue. Estimates of future profit potential and the ability to meet anticipated
funds flows often can be more easily assessed by analyzing the consolidated statements.
Q3-3 Parent company shareholders are likely to find consolidated statements more useful.
Noncontrolling shareholders may gain some understanding of the basic strength of the overall
economic entity by examining the consolidated statements; however, they have no control over
the parent company or other subsidiaries and therefore must rely on the assets and earning
power of the subsidiary in which they hold ownership. The separate statements of the subsidiary
are more likely to provide useful information to the noncontrolling shareholders.
Q3-4 A parent company has the ability to exercise control over one or more other entities.
Under existing standards, a company is considered to be a parent company when it has direct
or indirect control over a majority of the common stock of another company. The FASB has
proposed adoption of a broader definition of control that would not be based exclusively on
stock ownership.
Q3-5 Creditors of the parent company have primary claim to the assets held directly by the
parent. Short-term creditors of the parent are likely to look only at those assets. Because the
parent has control of the subsidiaries, the assets held by the subsidiaries are potentially
available to satisfy parent company debts. Long-term creditors of the parent generally must rely
on the soundness and operating efficiency of the overall entity, which normally is best seen by
examining the consolidated statements. On the other hand, creditors of a subsidiary typically
have a priority claim to the assets of that subsidiary and generally cannot lay claim to the assets
of the other companies. Consolidated statements therefore are not particularly useful to them.
Q3-6 When one company holds a majority of the voting shares of another company, the
investor should have the power to elect a majority of the board of directors of that company and
control its actions. Unless the investor holds controlling interest, there is always a chance that
another party may acquire a sufficient number of shares to gain control of the company, or that
the other shareholders may join together to take control.
Q3-7 The primary criterion for consolidation is the ability to directly or indirectly exercise
control. Control normally has been based on ownership of a majority of the voting common
stock of another company. The Financial Accounting Standards Board is currently working on a
broader definition of control. At present, consolidation should occur whenever majority
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Chapter 03 - The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential
ownership is held unless other circumstances indicate that control is temporary or does not rest
with the parent.
Q3-8 Consolidation is not appropriate when control is temporary or when the parent cannot
exercise control. For example, if the parent has agreed to sell a subsidiary or plans to reduce its
ownership below 50 percent shortly after year-end, the subsidiary should not be consolidated.
Control generally cannot be exercised when a subsidiary is under the control of the courts in
bankruptcy or reorganization. While most foreign subsidiaries should be consolidated,
subsidiaries in countries with unstable governments or those in which there are stringent
barriers to funds transfers generally should not be consolidated.
Q3-9 Strict adherence to consolidation standards based on majority ownership of voting
common stock has made it possible for companies to use many different forms of control over
other entities without being forced to include them in their consolidated financial statements. For
example, contractual arrangements often have been used to provide control over variable
interest entities even though another party may hold a majority (or all) of the equity ownership.
Q3-10 Special-purpose entities generally have been created by companies to acquire certain
types of financial assets from the companies and hold them to maturity. The special-purpose
entity typically purchases the financial assets from the company with money received from
issuing some form of collateralized obligation. If the company had borrowed the money directly,
its debt ratio would be substantially increased.
Q3-11 A variable interest entity normally is not involved in general business activity such as
producing products and selling them to customers. They often are used to acquire financial
assets from other companies or to borrow money and channel it other companies. A very large
portion of the assets held by variable interest entities typically is financed by debt and a small
portion financed by equity holders. Contractual agreements often give effective control of the
activities of the special-purpose entity to someone other than the equity holders.
Q3-12 FIN 46R provides a number of guidelines to be used in determining when a company is
a primary beneficiary of a variable interest entity. Generally, the primary beneficiary will absorb
a majority of the entity’s expected losses or receive a majority of the entity’s expected residual
returns.
Q3-13 Indirect control occurs when the parent controls one or more subsidiaries that, in turn,
hold controlling interest in another company. Company A would indirectly control Company Z if
Company A held 80 percent ownership of Company M and that company held 70 percent of the
ownership of Company Z.
Q3-14 It is possible for a company to exercise control over another company without holding a
majority of the voting common stock. Contractual agreements, for example, may provide a
company with complete control of both the operating and financing decisions of another
company. In other cases, ownership of a substantial portion of a company's shares and a broad
based ownership of the other shares may give effective control to a company even though it
does not have majority ownership. There is no prohibition to consolidation with less than
majority ownership; however, few companies have elected to consolidate with less than majority
control.
Q3-15 Unless intercompany receivables and payables are eliminated, there is an
overstatement of the true balances. The result is a distortion of the current asset ratio and other
ratios such as those that relate current assets to noncurrent assets or current liabilities to
noncurrent liabilities or to stockholders' equity balances.
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Chapter 03 - The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential
Q3-16 The consolidated statements are prepared from the viewpoint of the parent company
shareholders and only the amounts assignable to parent company shareholders are included in
the consolidated stockholders' equity balances. Subsidiary shares held by the parent are not
owned by an outside party and therefore cannot be reported as shares outstanding. Those held
by the noncontrolling shareholders are included in the balance assigned to noncontrolling
shareholders in the consolidated balance sheet rather than being shown as stock outstanding.
Q3-17 While it is not considered appropriate to consolidate if the fiscal periods of the parent
and subsidiary differ by more than 3 months, a difference in time periods cannot be used as a
means of avoiding consolidation. The fiscal period of one of the companies must be adjusted to
fall within an acceptable time period and consolidated statement prepared.
Q3-18 The noncontrolling interest, or minority interest, represents the claim on the net assets of
the subsidiary assigned to the shares not controlled by the parent company.
Q3-19 The procedures used in preparing consolidated and combined financial statements may
be virtually identical. In general, consolidated statements are prepared when a parent company
either directly or indirectly controls one or more subsidiaries. Combined financial statements are
prepared for a group of companies or business entities when there is no parent-subsidiary
relationship. For example, an individual who controls several companies may gain a clearer
picture of the financial position and operating results of the overall operations under his or her
control by preparing combined financial statements.
Q3-20 Under the proprietary theory the parent company includes only a proportionate share of
the assets and liabilities and income statement items of a subsidiary in its financial statements.
Thus, if a subsidiary is 60 percent owned, the parent will include only 60 percent of the cash and
accounts receivable of the subsidiary in its consolidated balance sheet. Under current practice
the full amount of the balance sheet and income statement items of the subsidiary are included
in the consolidated statements.
Q3-21 Under both current practice and the entity theory the consolidated statements are
viewed as those of a single economic entity with a shareholder group that includes both
controlling and noncontrolling shareholders, each with an equity interest in the consolidated
entity. The assets and liabilities of the subsidiary are included in the consolidated statements at
100 percent of their fair value at the date of acquisition and consolidated net income includes
the earnings to both controlling and noncontrolling shareholders. A major difference occurs in
presenting retained earnings in the consolidated balance sheet. Only undistributed earnings
related to the controlling interest are included in the retained earnings balance.
Q3-22 The entity theory is closest to the newly adopted procedures used in current practice.
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Chapter 03 - The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential
SOLUTIONS TO CASES
C3-1 Computation of Total Asset Values
The relationship observed should always be true. Assets reported by the parent company
include its investment in the net assets of the subsidiaries. These totals must be eliminated in
the consolidation process to avoid double counting. There also may be intercompany
receivables and payables between the companies that must be eliminated when consolidated
statements are prepared. In addition, inventory or other assets reported by the individual
companies may be overstated as a result of unrealized profits on intercorporate purchases and
sales. The amounts of the assets must be adjusted and the unrealized profits eliminated in the
consolidation process. In addition, subsidiary assets and liabilities at the time the subsidiaries
were acquired by the parent may have had fair values different from their book values, and the
amounts reported in the consolidated financial statements would be based on those fair values.
C3-2 Accounting Entity [AICPA Adapted]
a.
(1) The conventional or traditional approach has been used to define the accounting entity
in terms of a specific firm, enterprise, or economic unit that is separate and apart from the
owner or owners and from other enterprises. The accounting entity has not necessarily
been defined in the same way as a legal entity. For example, partnerships and sole
proprietorships are accounted for separately from the owners although such a distinction
might not exist legally. Thus, it was recognized that the transactions of the enterprise
should be accounted for and reported on separately from those of the owners.
An extension of this approach is to define the accounting entity in terms of an economic
unit that controls resources, makes and carries out commitments, and conducts economic
activity. In the broadest sense an accounting entity could be established in any situation
where there is an input-output relationship. Such an accounting entity may be an individual,
a profit-seeking or not-for-profit enterprise, or a subdivision of a profit-seeking or not-forprofit enterprise for which a system of accounts is maintained. This approach is oriented
toward providing information to the economic entity which it can use in evaluating its
operating results and financial position.
An alternative approach is to define the accounting entity in terms of an area of economic
interest to a particular individual, group, or institution. The boundaries of such an economic
entity would be identified by determining (a) the interested individual, group, or institution
and (b) the nature of that individual's, group's, or institution's interest. In theory a number of
separate legal entities or economic units could be included in a single accounting entity.
Thus, this approach is oriented to the external users of financial reports.
(2) The way in which an accounting entity is defined establishes the boundaries of the
possible objects, attributes, or activities that will be included in the accounting records and
reports. Knowledge as to the nature of the entity may aid in determining (1) what
information to include in reports of the entity and (2) how to best present information about
the entity so that relevant features are disclosed and irrelevant features do not cloud the
presentation.
The applicability of all other generally accepted concepts (or principles or postulates) of
accounting (for example, continuity, money measurement, and time periods) depends on
the established boundaries and nature of the accounting entity. The other accounting
concepts lack significance without reference to an entity. The entity must be defined before
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Chapter 03 - The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential
the balance of the accounting model can be applied and the accounting can begin. Thus,
the accounting entity concept is so fundamental that it pervades all accounting.
b.
(1) Units created by or under law, such as corporations, partnerships, and, occasionally,
sole proprietorships, probably are the most common types of accounting entities.
(2) Product lines or other segments of an enterprise, such as a division, department, profit
center, branch, or cost center, can be treated as accounting entities. For example, financial
reporting by segment was supported by investors, the Securities and Exchange
Commission, financial executives, and members of the accounting profession.
(3) Most large corporations issue consolidated financial reports. These statements often
include the financial statements of a number of separate legal entities that are considered
to constitute a single economic entity for financial reporting purposes.
(4) Although the accounting entity often is defined in terms of a business enterprise that is
separate and distinct from other activities of the owner or owners, it also is possible for an
accounting entity to embrace all the activities of an owner or a group of owners. Examples
include financial statements for an individual (personal financial statements) and the
financial report of a person's estate.
(5) The entire economy of the United States also can be viewed as an accounting entity.
Consistent with this view, national income accounts are compiled by the U. S. Department
of Commerce and regularly reported.
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Chapter 03 - The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential
C3-3 Recognition of Fair Value and Goodwill
MEMO
TO:
From:
Re:
Mr. R. U. Cleer, Chief Financial Officer
March Corporation
, CPA
Analysis of changes resulting from FASB 141R
March Corporation purchased 65 percent of the stock of Ember Corporation for $708,500 at a
time when the book value of Ember’s net assets was $810,000 and March’s 65 percent share of
that amount was $526,500. Management determined that the fair value of Ember’s assets was
$960,000, and March’s 65 percent share of the difference between fair value and book value
was $97,500. The remaining amount of the purchase price was allocated to goodwill, computed
as follows:
Purchase price
Book value of 65 percent share of net assets
Differential
Fair value increment
Goodwill
$708,500
(526,500)
$182,000
(97,500)
$ 84,500
The reporting standards in effect at January 2, 2008, required March to include in its
consolidated balance sheet 100 percent of the book value of Ember’s net assets. The
consolidated balance sheet also included the amount paid by March in excess of its share of
book value, assigned to depreciable assets and goodwill. The noncontrolling interest was
reported in the consolidated balance sheet at $283,500 ($810,000 x .35) and did not include any
amounts related to the differential.
Under FASB Statement No. 141R (ASC 805), the amounts included in the consolidated
balance sheet are based on the $1,090,000 total fair value of Ember at the date of combination,
as evidenced by the fair value of the consideration given in the exchange by March Corporation
($708,500) and the fair value of the noncontrolling interest ($381,500). The assets of Ember are
valued at their $960,000 total fair value, resulting in a $150,000 increase over their book value.
Goodwill is calculated as the difference between the $1,090,000 total fair value of Ember and
the $960,000 fair value of its assets. The noncontrolling interest is valued initially at its fair
value at the date of combination.
The following comparison shows the amounts related to Ember that were reported in March’s
consolidated balance sheet prepared immediately after the acquisition of Ember and the
amounts that would have been reported had FASB Statement No. 141R (ASC 805) been in
effect:
Prior Standards
$810,000
97,500
84,500
$992,000
Book value of Ember’s net assets
Fair value increment
Goodwill
Total
Noncontrolling interest
$283,500
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FASB 141R
$ 810,000
150,000
130,000
$1,090,000
$381,500
Chapter 03 - The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential
Amortization of the fair value increment in March’s 2008 consolidated income statement was
$9,750 ($97,500/10). Under FASB Statement No. 141R (ASC 850), the annual write-off would
have been $15,000 ($150,000/10).
Primary citations:
FASB 141R (ASC 805)
C3-4 Joint Venture Investment
a. ARB No. 51 (ASC 810) and FASB Interpretation No. 46R (FIN 46R) (ASC 810) are the
primary authoritative pronouncements dealing with the types of ownership issues arising in this
situation. Under normal circumstances, the company holding majority ownership in another
entity is expected to consolidate that entity in preparing its financial statements. Thus, unless
other circumstances dictate, Dell should have planned to consolidate DFS as a result of its 70
percent equity ownership. While FIN 46R (ASC 810) is a highly complex document and greater
detail of the ownership agreement may be needed to decide this matter, the interpretation
appears to permit equity holders to avoid consolidating an entity if the equity holders (1) do not
have the ability to make decisions about the entity’s activities, (2) are not obligated to absorb the
expected losses of the entity if they occur, or (3) do not have the right to receive the expected
residual returns of the entity if they occur [FIN 46R, Par. 5b; ASC 810-10-15-14].
It does appear that Dell and CIT Group do, in fact, have the ability to make operating and other
decisions about DFS, they must absorb losses in the manner set forth in the agreement, and
they must share residual returns in the manner set forth in the agreement. Control appears to
reside with the equity holders and should not provide a barrier to consolidation.
Dell might argue that it need not consolidate DFS because the joint venture agreement
apparently did allocate losses initially to CIT. However, these losses were to be recovered from
future income. Thus, both Dell and CIT were to be affected by the profits and losses of DFS.
Given the importance of DFS to Dell and representation on the board of directors by CIT, DFS
would not be expected to sustain continued losses.
In light of the joint venture arrangement and Dell’s ownership interest, consolidation by Dell
seems appropriate and there seems to be little support for Dell not consolidating DFS.
b. Yes, Dell does employ off-balance sheet financing. It sells customer financing receivables to
qualifying special-purpose entities. In accordance with current standards, qualifying SPEs are
not consolidated.
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Chapter 03 - The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential
C3-5 Need for Consolidation [AICPA Adapted]
a. All identifiable assets acquired and liabilities assumed in a business combination, whether or
not shown in the financial statements of Moore, should be valued at their fair values at the date
of acquisition. Then, the excess of the fair value of the consideration given by Sharp to acquire
its ownership interest in Moore, plus the fair value of the noncontrolling interest, over the sum of
the amounts assigned to the identifiable assets acquired less liabilities assumed should be
recognized as goodwill.
b. Consolidated financial statements should be prepared in order to present the financial
position and operating results for an economic entity in a manner more meaningful than if
separate statements are prepared.
c. The usual first necessary condition for consolidation is a controlling financial interest. Under
current accounting standards, a controlling financial interest is assumed to exist when one
company, directly or indirectly, owns over fifty percent of the outstanding voting shares of
another company.
C3-6 What Company is That?
Information for answering this case can be obtained from the SEC's EDGAR database
(www.sec.gov) and from the home pages for Viacom (www.viacom.com), ConAgra
(www.conagra.com), and Yum! Brands (www.yum.com).
a.. Viacom is well known for ownership of companies in the entertainment industry. On January
1, 2006, Viacom divided its operations by spinning off to Viacom shareholders ownership of
CBS Corporation. Following the division Viacom continues to own MTV, Nickelodeon, Nick at
Nite, Comedy Central, Country Music Television, Paramount Pictures, Paramount Home
Entertainment, SKG, BET, Dreamworks, and other related companies. Summer Redstone holds
controlling interest in both Viacom and CBS and serves as Executive Chairman of both
companies.
b. Some of the well-known product lines of ConAgra include Healthy Choice, Pam, Peter Pan,
Slim Jim, Swiss Miss, Orville Redenbacher’s, Hunt’s, Reddi-Wip, VanCamp, Libby’s, LaChoy,
Egg Beaters, Wesson, Banquet, Blue Bonnet, Chef Boyardee, Parkay, and Rosarita.
c. Yum! Brands, Inc., is the world’s largest quick service restaurant company. Well known
brands include Taco Bell, A&W, KFC, and Pizza Hut. Yum was originally spun off from Pepsico
in 1997. Prior to its current name, Yum’s name was TRICON Global Restaurants, Inc.
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Chapter 03 - The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential
C3-7 Subsidiaries and Core Businesses
Most of the information needed to answer this case can be obtained from articles available in
libraries, on the Internet, or through various online databases. Some of the information is
available in filings with the SEC (www.sec.gov).
a. General Electric was never able to turn Kidder, Peabody into a profitable subsidiary. In fact,
Kidder became such a drain on the resources of General Electric, that GE decided to get rid of
Kidder. Unfortunately, GE was unable to sell the company as a whole and ultimately broke the
company into pieces and sold the pieces that it could. GE suffered large losses from its venture
into the brokerage business.
b. Sears, Roebuck and Co. has been a major retailer for many decades. For a while, Sears
attempted to provide virtually all consumer needs so that customers could purchase financial
and related services at Sears in addition to goods. It owned more than 200 other companies.
During that time, Sears sold insurance (Allstate Insurance Group, consisting of many
subsidiaries), real estate (Coldwell Banker Real Estate Group, consisting of many subsidiaries),
brokerage and investment advisor services (Dean Witter), credit cards (Sears and Discover
Card), and various other related services through many different subsidiaries. During the midnineties, Sears sold or spun off most of its subsidiaries that were unrelated to its core business,
including Allstate, Coldwell Banker, Dean Witter, and Discover. On March 24, 2005, Sears
Holding Corporation was established and became the parent company for Sears, Roebuck and
Co. and K Mart Holding Corporation. From an accounting perspective, Kmart acquired Sears,
even though Kmart had just emerged from bankruptcy proceedings. Following the merger the
company now has approximately 2,350 full-line and off-mall stores and 1,100 specialty retail
stores in the United States, and approximately 370 full-line and specialty retail stores in Canada.
c. PepsiCo entered the restaurant business in 1977 with the purchase of Pizza Hut. By 1986,
PepsiCo also owned Taco Bell and KFC (Kentucky Fried Chicken). In 1997, these subsidiaries
were spun off to a new company, TRICON Global Restaurants, with TRICON's stock distributed
to PepsiCo's shareholders. TRICON Global Restaurants changed its name to YUM! Brands,
Inc., in 2002. Although PepsiCo exited the restaurant business, it continued in the snack-food
business with its Frito-Lay subsidiary, the world's largest maker of salty snacks. PepsiCo bought
Quaker Oats Company in 2001—an acquisition that brought Gatorade under the PepsiCo
name.
d. When consolidated financial statements are presented, financial statement users are
provided with information about the company's overall operations. Assessments can be made
about how the company as a whole has fared as a result of all its operations. However,
comparisons with other companies may be difficult because the operations of other companies
may not be similar. If a company operates in a number of different industries, consolidated
financial statements may not permit detailed comparisons with other companies unless the
other companies operate in all of the same industries, with about the same relative mix. Thus,
standard measures used in manufacturing and merchandising, such as gross margin
percentage, inventory and receivables turnover, and the debt-to-asset ratio, may be useless or
even misleading when significant financial-services operations are included in the financial
statements. Similarly, standard measures used in comparing financial institutions might be
distorted when financial statement information includes data relating to manufacturing or
merchandising operations. A partial solution to the problem results from providing disaggregated
(segment or line-of-business) information along with the consolidated financial statements, as
required by the FASB.
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Chapter 03 - The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential
C3-8 International Consolidation Issues
The following answers are based on information from the Financial Accounting Standards Board
website at www.fasb.org, the International Accounting Standards Board website at
www.iasb.org, and from the PricewaterhouseCoopers publication entitled IFRS and US GAAP:
similarities
and
differences
September
2010,
available
online
at
http://www.pwc.com/us/en/issues/ifrs-reporting/publications/ifrs-and-us-gaapsimilarities-and-differences-september-2010.jhtml. Note that the original URL listed in the
book refers to the 2009 update. However, it still forwards to the new URL.
a. Consolidation under IFRS is required when an entity is able to govern the policies of another
entity in order to obtain benefits. To determine if consolidation is necessary, IFRS focuses on
the concept of control. Factors of control, such as voting rights and contractual rights, are given
by international standards. If control is not apparent, a general assessment of the relationship is
required, including an evaluation of the allocation of risks and benefits. (See pages 154, 157)
b. Under IFRS, Goodwill is reviewed annually (or more frequently) for impairment. Goodwill is
initially allocated at the organizational level where cash flows can be clearly identified. These
cash generating units (CGUs) may be combined for purposes of allocating goodwill and for the
subsequent evaluation of goodwill for potential impairment. However, the aggregation of CGUs
for goodwill allocation and evaluation must not be larger than a segment.
Similar to U.S. GAAP, the impairment review must be done annually, but the evaluation date
does not have to coincide with the end of the reporting year. However, if the annual impairment
test has already been performed prior to the allocation of goodwill acquired during the fiscal
year, a subsequent impairment test is required before the balance sheet date.
While U.S. GAAP requires a two-step impairment test, IFRS requires a one-step test. The
recoverable amount, which is the greater of the net fair market value of the CGU and the value
of the unit in use, is compared to the book value of the CGU to determine if an impairment loss
exists. A loss exists when the carrying value exceeds the recoverable amount. This loss is
recognized in operating results. The impairment loss applies to all of the assets of the unit and
must be allocated to assets in the unit. Impairment is allocated first to goodwill. If the impairment
loss exceeds the book value of goodwill, then allocation is made on a pro rata basis to the other
assets in the CGU. (See page 174)
c. Under IFRS, entities have the option of measuring noncontrolling interests at either their
proportion of the fair value or at full fair value. When using the full fair value option, the full value
of goodwill will be recorded on both the controlling and noncontrolling interest. (See page 175)
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Chapter 03 - The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential
C3-9 Off-Balance Sheet Financing and VIEs
a. Off-balance sheet financing refers to techniques that allow companies to borrow while
keeping the debt, and related assets, from being reported in the company’s balance sheet.
b. (1) Funds to acquire new assets for a company may be borrowed by a third party such as a
VIE, with the acquired assets then leased to the company.
(2) A company may sell assets such as accounts receivable instead of using them as
collateral.
(3) A company may create a new VIE and transfer assets to the new entity in exchange for
cash.
c. VIEs may serve a genuine business purpose, such as risk sharing among investors and
isolation of project risk from company risk.
d. VIEs may be structured to avoid consolidation. To the extent that standards for consolidation
are rule-based, it is possible to structure a VIE so that it is not consolidated even if the
underlying economic substance of the entity would indicate that it should be consolidated. By
artificially removing debt, assets, and expenses from the financial reports of the sponsoring
company, the financial position of a company and the results of its operations can be distorted.
The FASB has been working to ensure that rule-based consolidation standards result in
financial statements that reflect the underlying economic substance.
C3-10 Alternative Accounting Methods
a. Amerada Hess’s (www.hess.com) interests in oil and gas exploration and production
ventures are proportionately consolidated (pro rata consolidation), a frequently found industry
practice in oil and gas exploration and production. Investments in affiliated companies, 20 to 50
percent owned, are reported using the equity method. A 50 percent interest in a trading
partnership over which the company exercises control is consolidated.
b. EnCana Corporation (www.encana.com) reports investments in companies over which it has
significant influence using the equity method. Investments in jointly controlled companies and
ventures are accounted for using proportionate consolidation. EnCana is a Canadian company.
Proportionate consolidation is found more frequently outside of the United States. Although not
considered generally accepted in the United States, proportionate (pro rata) consolidation is
nevertheless sometimes found in the oil and gas exploration and transmission industries.
c. If a joint venture is not incorporated, its treatment is less clear than for corporations.
Generally, the equity method should be used, but companies sometimes use proportionate
consolidated citing joint control as the reason.
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Chapter 03 - The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential
C3-11 Consolidation Differences among Major Corporations
a. Union Pacific is rather unusual for a large company. It has only two subsidiaries:
Union Pacific Railroad Company
Southern Pacific Rail Corporation
b. ExxonMobil does not consolidate majority owned subsidiaries if the minority shareholders
have the right to participate in significant management decisions. ExxonMobil does consolidate
some variable interest entities even though it has less than majority ownership according to its
Form 10-K “because of guarantees or other arrangements that create majority economic
interests in those affiliates that are greater than the Corporation’s voting interests.” The
company uses the equity method, cost method, and fair value method to account for
investments in the common stock of companies in which it holds less than majority ownership.
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Chapter 03 - The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential
SOLUTIONS TO EXERCISES
E3-1 Multiple-Choice Questions on Consolidation Overview
[AICPA Adapted]
1. d
2. c
3. b
4. a
5. b
E3-2 Multiple-Choice Questions on Variable Interest Entities
1. c
2. d
3. a
4. b
E3-3 Multiple-Choice Questions on Consolidated Balances [AICPA Adapted]
1. a
2. b
3. b
4. c
5. a
E3-4 Multiple-Choice Questions on Consolidation Overview
[AICPA Adapted]
1. d
2. The wording of this question is somewhat confusing. Since Aaron owns 80% of Belle, it has
to consolidate Belle. There is no “choice” about whether or not to consolidate. A more clear
wording of the question would say to compare Aaron’s parent company earnings (Y) to the
consolidated earnings (X). The question also assumes both companies have positive
earnings.
a (if Aaron accounts for the investment under the cost method)
b (if Aaron accounts for the investment under the equity method)
3-13
Chapter 03 - The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential
3. b
4. d
E3-5 Balance Sheet Consolidation
a. $470,000 = $470,000 - $44,000 + $44,000
b. $616,000 = ($470,000 - $44,000) + $190,000
c. $405,000 = $270,000 + $135,000
d. $211,000
Acquisition price
÷ percent purchased
Total fair value of Bristol Corporation's NA
NCI in NA of Bristol Corporation
$
$
44,000
80%
55,000
$
Guild Corporation's Stockholder’s Equity
Total Consolidated Stockholder's Equity
11,000
200,000
$ 211,000
E3-6 Balance Sheet Consolidation with Intercompany Transfer
a. $631,500 = $510,000 + $121,500
b. $845,000 = $510,000 + $350,000 - $15,000
c. $641,500 = ($320,000 + $121,500) + $215,000 - $15,000
d. $203,500
Acquisition price
÷ percent purchased
Total fair value of Stately Corporation's NA
NCI in NA of Stately Corporation
$
$
121,500
90%
135,000
$
Potter Company's Stockholder’s Equity
Total Consolidated Stockholder's Equity
13,500
190,000
$ 203,500
3-14
Chapter 03 - The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential
E3-7 Subsidiary Acquired for Cash
Equity Method Entries on Fineline Pencil's Books:
Investment in Smudge Eraser
Cash
72,000
72,000
Record the initial investment in Smudge Eraser
Book Value Calculations:
+
NCI
20%
Original book value
Fineline
Pencil
80%
18,000
=
Common
Stock
72,000
50,000
1/1/X3
Goodwill = 0
Identifiable
excess = 0
$72,000
Initial
investment
in Smudge
Eraser
80%
Book value =
72,000
Basic Elimination Entry
Common stock
Retained earnings
Investment in Smudge Eraser
NCI in NA of Smudge Eraser
50,000
40,000
72,000
18,000
Investment in
Smudge Eraser
Acquisition Price
72,000
72,000
Basic Entry
0
3-15
+
Retained
Earnings
40,000
Chapter 03 - The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential
E3-7 (continued)
Elimination
Entries
Fineline
Pencil
Smudge
Eraser
Cash
128,000
50,000
178,000
Other Assets
400,000
120,000
520,000
DR
CR
Consolidated
Balance Sheet
Investment in Smudge Eraser
72,000
Total Assets
600,000
170,000
0
Current Liabilities
100,000
80,000
Common Stock
300,000
50,000
50,000
Retained Earnings
200,000
40,000
40,000
600,000
0
72,000
698,000
180,000
NCI in NA of Smudge Eraser
Total Liabilities & Equity
72,000
170,000
90,000
300,000
200,000
18,000
18,000
18,000
698,000
Fineline Pencil Company and Subsidiary
Consolidated Balance Sheet
January 2, 20X3
Cash ($128,000 + $50,000)
Other Assets ($400,000 + $120,000)
Total Assets
$178,000
520,000
$698,000
Current Liabilities ($100,000 + $80,000)
Common Stock
Retained Earnings
Noncontrolling Interest in Net Assets of Smudge Eraser
Total Liabilities and Stockholders' Equity
$180,000
300,000
200,000
18,000
$698,000
E3-8 Subsidiary Acquired with Bonds
Equity Method Entries on Byte Computer's Books:
Investment in Nofail Software
Cash
67,500
67,500
Record the initial investment in Nofail Software
Book Value Calculations:
NCI
25%
Original book value
22,500
+
Byte
Computer
75%
=
67,500
3-16
Common
Stock
50,000
+
Retained
Earnings
40,000
Chapter 03 - The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential
1/1/X3
Goodwill = 0
Identifiable
excess = 0
$67,500
Initial
investment
in Nofail
Software
75%
Book value =
67,500
Basic Elimination Entry
Common stock
Retained earnings
Investment in Nofail Software
NCI in NA of Nofail Software
50,000
40,000
67,500
22,500
Investment in
Nofail Software
Acquisition Price
67,500
67,500
Basic Entry
0
3-17
Chapter 03 - The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential
E3-8 (continued)
Elimination
Entries
Byte
Computer
Nofail
Software
Cash
200,000
50,000
250,000
Other Assets
400,000
120,000
520,000
DR
CR
Consolidated
Balance Sheet
Investment in Nofail Software
67,500
Total Assets
667,500
170,000
Current Liabilities
100,000
80,000
Bonds Payable
0
67,500
0
67,500
770,000
180,000
50,000
50,000
Bond Premium
17,500
Common Stock
300,000
50,000
50,000
300,000
17,500
Retained Earnings
200,000
40,000
40,000
200,000
NCI in NA of Nofail Software
Total Liabilities & Equity
667,500
170,000
90,000
22,500
22,500
22,500
770,000
Byte Computer Corporation and Subsidiary
Consolidated Balance Sheet
January 2, 20X3
Cash ($200,000 + $50,000)
Other Assets ($400,000 + $120,000)
Total Assets
$250,000
520,000
$770,000
Current Liabilities
Bonds Payable
Bond Premium
Common Stock
Retained Earnings
Noncontrolling Interest in Net Assets of Smudge Eraser
Total Liabilities and Stockholders' Equity
E3-9 Subsidiary Acquired by Issuing Preferred Stock
Equity Method Entries on Byte Computer's Books:
Investment in Nofail Software
Preferred Stock
Additional Paid-In Capital
81,000
60,000
21,000
Record the initial investment in Nofail Software
3-18
$180,000
$50,000
17,500
67,500
300,000
200,000
22,500
$770,000
Chapter 03 - The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential
Book Value Calculations:
NCI
10%
Original book value
+
Byte
Computer
90%
9,000
=
Common
Stock
81,000
50,000
1/1/X3
Goodwill = 0
Identifiable
excess = 0
$81,000
Initial
investment
in Nofail
Software
90%
Book value =
81,000
Basic Elimination Entry
Common stock
Retained earnings
Investment in Nofail Software
NCI in NA of Nofail Software
50,000
40,000
81,000
9,000
Investment in
Nofail Software
Acquisition Price
81,000
81,000
Basic Entry
0
3-19
+
Retained
Earnings
40,000
Chapter 03 - The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential
E3-9 (continued)
Byte
Computer
Nofail
Software
Cash
200,000
50,000
Other Assets
400,000
120,000
Elimination Entries
DR
CR
Consolidated
Balance Sheet
Investment in Nofail Software
250,000
520,000
81,000
Total Assets
681,000
170,000
Current Liabilities
100,000
80,000
0
81,000
0
81,000
770,000
180,000
Preferred Stock
60,000
60,000
Additional Paid-In Capital
21,000
21,000
Common Stock
300,000
50,000
50,000
300,000
Retained Earnings
200,000
40,000
40,000
200,000
NCI in NA of Nofail Software
Total Liabilities & Equity
681,000
170,000
90,000
9,000
9,000
9,000
770,000
Byte Computer Corporation and Subsidiary
Consolidated Balance Sheet
January 2, 20X3
Cash ($200,000 + $50,000)
Other Assets ($400,000 + $120,000)
Total Assets
$250,000
520,000
$770,000
Current Liabilities ($100,000 + $80,000)
Preferred Stock ($6 x 10,000)
Additional Paid-In Capital ($2.10 x 10,000)
Common Stock
Retained Earnings
Noncontrolling Interest in Net Assets of Nofail
Total Liabilities and Stockholders' Equity
$180,000
60,000
21,000
300,000
200,000
9,000
$770,000
3-20
Chapter 03 - The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential
E3-10 Reporting for a Variable Interest Entity
Gamble Company
Consolidated Balance Sheet
Cash
Buildings and Equipment
Less: Accumulated Depreciation
Total Assets
$ 18,600,000(a)
$370,600,000(b)
(10,100,000)
Accounts Payable
Bonds Payable
Bank Notes Payable
Noncontrolling Interest
Common Stock
Retained Earnings
Total Liabilities and Equities
(a) $18,600,000
(b) $370,600,000
360,500,000
$379,100,000
$
$103,000,000
105,200,000
5,000,000
20,300,000
140,000,000
5,600,000
208,200,000
$379,100,000
= $3,000,000 + $5,600,000 + ($140,000,000 – $130,000,000)
= $240,600,000 + $130,000,000
E3-11 Consolidation of a Variable Interest Entity
Teal Corporation
Consolidated Balance Sheet
Total Assets
$682,500(a)
Total Liabilities
Noncontrolling Interest
Common Stock
Retained Earnings
Total Liabilities and Equities
$550,000(b)
22,500(c)
(a) $682,500
(b) $550,000
(c) $22,500
=
=
=
$15,000
95,000
$500,000 + $190,000 - $7,500
$470,000 + $80,000
($500,000 - $470,000) x 0.75
E3-12 Computation of Subsidiary Net Income
Messer Company reported net income of $60,000 ($18,000 / 0.30) for 20X9.
3-21
110,000
$682,500
Chapter 03 - The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential
E3-13 Incomplete Consolidation
a.
b.
Belchfire apparently owns 100 percent of the stock of Premium Body Shop since the
balance in the investment account reported by Belchfire is equal to the net book value of
Premium Body Shop.
Accounts Payable
$
60,000
Accounts receivable were reduced by
$10,000, presumably as a reduction
of receivables and payables.
Bonds Payable
600,000
There is no indication of intercorporate
ownership.
Common Stock
200,000
Common stock of Premium must be
eliminated.
Retained Earnings
260,000
Retained earnings of Premium also must
be
eliminated
in
preparing
consolidated statements.
$1,120,000
E3-14 Noncontrolling Interest
a. The total noncontrolling interest reported in the consolidated balance sheet at January 1,
20X7, is $126,000 ($420,000 x .30).
b. The stockholders' equity section of the consolidated balance sheet includes the claim of the
noncontrolling interest and the stockholders' equity section of the subsidiary is eliminated
when the consolidated balance sheet is prepared:
Controlling Interest:
Common Stock
Additional Paid-In Capital
Retained Earnings
Total Controlling Interest
Noncontrolling Interest
Total Stockholders’ Equity
$ 400,000
222,000
358,000
$ 980,000
126,000
$1,106,000
c. Sanderson is mainly interested in assuring a steady supply of electronic switches. It can
control the operations of Kline with 70 percent ownership and can use the money that would
be needed to purchase the remaining shares of Kline to finance additional operations or
purchase other investments.
3-22
Chapter 03 - The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential
E3-15 Computation of Consolidated Net Income
a. Ambrose should report income from its subsidiary of $15,000 ($20,000 x .75) rather than
dividend income of $9,000.
b. A total of $5,000 ($20,000 x .25) should be assigned to the noncontrolling interest in the
20X4 consolidated income statement.
c. Consolidated net income of $70,0000 should be reported for 20X4, computed as follows:
Reported net income of Ambrose
Less: Dividend income from Kroop
Operating income of Ambrose
Net income of Kroop
Consolidated net income
$59,000
(9,000)
$50,000
20,000
$70,000
d. Income of $79,000 would be attained by adding the income reported by Ambrose ($59,000)
to the income reported by Kroop ($20,000). However, the dividend income from Kroop
recorded by Ambrose must be excluded from consolidated net income.
E3-16 Computation of Subsidiary Balances
a.
Light's net income for 20X2 was $32,000 ($8,000 / 0.25).
b. Common Stock Outstanding (1)
Additional Paid-In Capital (given)
Retained Earnings ($70,000 + $32,000)
Total Stockholders' Equity
$120,000
40,000
102,000
$262,000
(1) Computation of common stock outstanding:
Total stockholders' equity ($65,500 / 0.25)
Additional paid-in capital
Retained earnings
Common stock outstanding
3-23
$262,000
(40,000)
(102,000)
$120,000
Chapter 03 - The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential
E3-17 Subsidiary Acquired at Net Book Value
Equity Method Entries on Banner Corp.'s Books:
Investment in Dwyer Co.
Cash
36,000
136,000
Record the initial investment in Dwyer Co.
Book Value Calculations:
NCI
20%
Original book value
+
Banner
Corp.
80%
34,000
=
136,000
Common
Stock
90,000
1/1/X8
Goodwill = 0
Identifiable
excess = 0
$136,000
Initial
investment
in Dwyer
Co.
80%
Book value =
136,000
Basic Elimination Entry
Common stock
Retained earnings
Investment in Dwyer Co.
NCI in NA of Dwyer Co.
90,000
80,000
136,000
34,000
Investment in
Dwyer Co.
Acquisition Price
136,000
136,000
Basic Entry
0
3-24
+
Retained
Earnings
80,000
Chapter 03 - The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential
E3-17 (continued)
Banner
Corp.
Dwyer
Co.
Elimination Entries
DR
CR
Consolidated
Balance Sheet
Cash
74,000
20,000
94,000
Accounts Receivable
120,000
70,000
190,000
Inventory
180,000
90,000
270,000
Fixed Assets (net)
350,000
240,000
590,000
Investment in Dwyer Co.
136,000
Total Assets
860,000
420,000
65,000
30,000
95,000
Notes Payable
350,000
220,000
570,000
Common Stock
150,000
90,000
90,000
Retained Earnings
295,000
80,000
80,000
Accounts Payable
0
NCI in NA of Dwyer Co.
Total Liabilities & Equity
860,000
420,000
170,000
136,000
0
136,000
1,144,000
150,000
295,000
34,000
34,000
34,000
1,144,000
Banner Corporation and Subsidiary
Consolidated Balance Sheet
December 31, 20X8
Cash ($74,000 + $20,000)
Accounts Receivable ($120,000 + $70,000)
Inventory ($180,000 + $90,000)
Fixed Assets (net) ($350,000 + $240,000)
Total Assets
$
94,000
190,000
270,000
590,000
$1,144,000
Accounts Payable ($65,000 + $30,000)
Notes Payable ($350,000 + $220,000)
Common Stock
Retained Earnings
Noncontrolling Interest in Net Assets of Dwyer Co.
Total Liabilities and Stockholders' Equity
$
95,000
570,000
150,000
295,000
34,000
$1,144,000
E3-18 Applying Alternative Accounting Theories
a.
Proprietary theory:
Total revenue [$400,000 + ($200,000 x .75)]
Total expenses [$280,000 + ($160,000 x .75)]
Consolidated net income [$120,000 + ($40,000 x .75)]
b.
$550,000
400,000
150,000
Parent company theory:
Total revenue ($400,000 + $200,000)
Total expenses ($280,000 + $160,000)
$600,000
440,000
3-25
Chapter 03 - The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential
Consolidated net income [$120,000 + ($40,000 x .75)]
c.
Entity theory:
Total revenue ($400,000 + $200,000)
Total expenses ($280,000 + $160,000)
Consolidated net income ($120,000 + $40,000)
d.
150,000
$600,000
440,000
160,000
Current accounting practice:
Total revenue ($400,000 + $200,000)
Total expenses ($280,000 + $160,000)
Consolidated net income ($120,000 + $40,000)
$600,000
440,000
160,000
E3-19 Measurement of Goodwill
a. $240,000
= computed in the same manner as under the parent company
approach.
b. $400,000
= $240,000 / 0.60
c. $400,000
= computed in the same manner as under the entity theory.
E3-20 Valuation of Assets under Alternative Accounting Theories
a. Entity theory:
Book Value
Fair Value Increase
($240,000 x 1.00)
($50,000 x 1.00)
$240,000
50,000
$290,000
b. Parent company theory:
Book Value
Fair Value Increase
($240,000 x 1.00)
($50,000 x 0.75)
$240,000
37,500
$277,500
c. Proprietary theory:
Book Value
Fair Value Increase
($240,000 x 0.75)
($50,000 x 0.75)
$180,000
37,500
$217,500
d. Current accounting practice:
Book Value
Fair Value Increase
($240,000 x 1.00)
($50,000 x 1.00)
$240,000
50,000
$290,000
E3-21 Reported Income under Alternative Accounting Theories
a. Entity theory:
3-26
Chapter 03 - The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential
Total revenue ($410,000 + $200,000)
Total expenses ($320,000 + $150,000)
Consolidated net income [$90,000 + ($50,000 x 1.00)]
$610,000
470,000
140,000
b. Parent company theory:
Total revenue ($410,000 + $200,000)
Total expenses ($320,000 + $150,000)
Consolidated net income [$90,000 + ($50,000 x 0.80)]
$610,000
470,000
130,000
c. Proprietary theory:
Total revenue [$410,000 + ($200,000 x 0.80)]
Total expenses [$320,000 + ($150,000 x 0.80)]
Consolidated net income [$90,000 + ($50,000 x 0.80)]
$570,000
440,000
130,000
d. Current accounting practice:
Total revenue ($410,000 + $200,000)
Total expenses ($320,000 + $150,000)
Consolidated net income [$90,000 + (50,000 x 1.00)]
$610,000
470,000
140,000
E3-22 Acquisition of Majority Ownership
a. Net identifiable assets: $720,000 = $520,000 + $200,000
b. Noncontrolling interest: $50,000 = $200,000 x 0.25
SOLUTIONS TO PROBLEMS
P3-23 Multiple-Choice Questions on Consolidated and Combined Financial Statements
[AICPA Adapted]
1. d
2. c
3. b
4. c
P3-24 Determining Net Income of Parent Company
Consolidated net income
Income of subsidiary ($15,200 / 0.40)
Income from Tally's operations
$164,300
(38,000)
$126,300
P3-25 Reported Balances
3-27
Chapter 03 - The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential
a.
The investment balance reported by Roof will be $192,000.
b.
Total assets will increase by $310,000.
c.
Total liabilities will increase by $95,000.
d.
The amount of goodwill for the entity as a whole will be $25,000
[($192,000 + $48,000) - ($310,000 - $95,000)].
e.
Noncontrolling interest will be reported at $48,000 ($240,000 x 0.20).
P3-26 Acquisition Price
a.
$57,000 = ($120,000 - $25,000) x 0.60
b.
$81,000 = ($120,000 - $25,000) + $40,000 - $54,000
c.
$48,800 = ($120,000 - $25,000) + $27,000 - $73,200
P3-27 Consolidation of a Variable Interest Entity
Stern Corporation
Consolidated Balance Sheet
January 1, 20X4
Cash
Accounts Receivable
Less: Allowance for Uncollectibles
Other Assets
Total Assets
$ 8,150,000 (a)
$12,200,000 (b)
(610,000) (c)
Accounts Payable
Notes Payable
Bonds Payable
Stockholders’ Equity:
Controlling Interest:
Common Stock
Retained Earnings
Total Controlling Interest
Noncontrolling Interest
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
(a) $ 8,150,000
(b) $12,200,000
(c) $ 610,000
=
=
=
11,590,000
5,400,000
$25,140,000
$
950,000
7,500,000
9,800,000
$
700,000
6,150,000
$ 6,850,000
40,000
6,890,000
$25,140,000
$7,960,000 + $190,000
$4,200,000 + $8,000,000
$210,000 + $400,000
3-28
Chapter 03 - The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential
P3-28 Reporting for Variable Interest Entities
Purified Oil Company
Consolidated Balance Sheet
Cash
Drilling Supplies
Accounts Receivable
Equipment (net)
Land
Total Assets
$
640,000
420,000
640,000
8,500,000
5,100,000
$15,300,000
Accounts Payable
Bank Loans Payable
Stockholders’ Equity:
Controlling Interest:
Common Stock
Retained Earnings
Total Controlling Interest
Noncontrolling Interest
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
$ 590,000
11,800,000
$ 560,000
2,150,000
$2,710,000
200,000
2,910,000
$15,300,000
P3-29 Consolidated Income Statement Data
a. Sales: ($300,000 + $200,000 - $50,000)
$450,000
b. Investment income from LoCal Bakeries:
$
c. Cost of goods sold: ($200,000 + $130,000 - $35,000)
$295,000
d. Depreciation expense: ($40,000 + $30,000)
$ 70,000
-0-
P3-30 Parent Company and Consolidated Amounts
a.
Common stock of Tempro Company
on December 31, 20X5
Retained earnings of Tempro Company
January 1, 20X5
Sales for 20X5
Less: Expenses
Dividends paid
Retained earnings of Tempro Company
on December 31, 20X5
Net book value on December 31, 20X5
Proportion of stock acquired by Quoton
Purchase price
$ 90,000
$130,000
195,000
(160,000)
(15,000)
150,000
$240,000
x
0.80
$192,000
3-29
Chapter 03 - The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential
b.
Net book value on December 31, 20X5
Proportion of stock held by
noncontrolling interest
Balance assigned to noncontrolling interest
$240,000
x
0.20
$ 48,000
c. Consolidated net income is $143,000. None of the 20X5 net income of Tempro Company
was earned after the date of purchase and, therefore, none can be included in consolidated
net income.
d. Consolidate net income would be $178,000 [$143,000 + ($195,000 - $160,000)].
P3-31 Parent Company and Consolidated Balances
a.
Balance in investment account, December 31, 20X7
Cumulative earnings since acquisition
Cumulative dividends since acquisition
Total
Proportion of stock held by True Corporation
Total Amount Debited to Investment Account
Purchase Amount
$259,800
110,000
(46,000)
$64,000
x
0.75
(48,000)
$211,800
b.
$282,400 ($211,800 / 0.75) is the fair value of net assets on January 1, 20X5
c.
$70,600 ($282,400 x 0.25) is the value assigned to the NCI shareholders on January 1,
20X5.
d.
$86,600 = ($259,800 / 0.75) x 0.25 will be assigned to noncontrolling interest in the
consolidated balance sheet prepared at December 31, 20X7.
P3-32 Indirect Ownership
The following ownership chain exists:
Purple
.70
Green
.40
.10
Orange
Yellow
.60
Blue
3-30
Chapter 03 - The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential
The earnings of Blue Company and Orange Corporation are included under cost method
reporting due to the 10 percent ownership level of Orange Corporation.
Net income of Green Company:
Reported operating income
Dividend income from Orange ($30,000 x 0.10)
Equity-method income from Yellow ($60,000 x 0.40)
Green Company net income
$ 20,000
3,000
24,000
$ 47,000
Consolidated net income:
Operating income of Purple
Net income of Green
Consolidated net income
$ 90,000
47,000
$137,000
Purple company net income (Not Required):
Operating income of Purple
Purple's share of Green's net income ($47,000 x 0.70)
Purple’s net income
$ 90,000
32,900
$122,900
P3-33 Balance Sheet Amounts under Alternative Accounting Theories
a.
Proprietary theory:
Cash and inventory [$300,000 + ($80,000 x 0.75)]
Buildings and Equipment (net)
[$400,000 + ($180,000 x 0.75)]
Goodwill [$210,000 - ($260,000 x 0.75)]
b.
$380,000
565,000
15,000
Entity theory:
Cash and inventory ($300,000 + $80,000)
Buildings and Equipment (net)
($400,000 + $180,000)
Goodwill [($210,000 / 0.75) - $260,000]
d.
535,000
15,000
Parent company theory:
Cash and inventory ($300,000 + $80,000)
Buildings and Equipment (net)
[$400,000 + $120,000 + ($60,000 x 0.75)]
Goodwill [$210,000 – ($260,000 x 0.75)]
c.
$360,000
$380,000
580,000
20,000
Current accounting practice:
Cash and inventory ($300,000 + $80,000)
Buildings and Equipment (net)
($400,000 + $180,000)
Goodwill [($210,000 / 0.75) - $260,000]
3-31
$380,000
580,000
20,000
Chapter 03 - The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential
P3-34 Consolidated Worksheet and Balance Sheet on the Acquisition Date (Equity
Method)
a.
Equity Method Entries on Peanut Co.'s Books:
Investment in Snoopy Co.
Cash
270,000
270,000
Record the initial investment in Snoopy Co.
b.
Book Value Calculations:
+
NCI
10%
Original book value
30,000
Peanut
Co.
90%
=
270,000
Common
Stock
200,000
+
Retained
Earnings
100,000
1/1/X8
Goodwill = 0
Identifiable
excess = 0
$270,000
Initial
investment
in Snoopy
Co.
90%
Book value =
270,000
Basic Elimination Entry
Common stock
Retained earnings
Investment in Snoopy Co.
NCI in NA of Snoopy Co.
200,000
100,000
270,000
30,000
Optional accumulated depreciation elimination entry
Accumulated depreciation
Building & equipment
10,000
10,000
Investment in
Snoopy Co.
Acquisition Price
270,000
270,000
Basic Entry
0
3-32
Chapter 03 - The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential
P3-34 (continued)
Peanut
Co.
Snoopy
Co.
Elimination Entries
DR
CR
Consolidated
Balance Sheet
Cash
Accounts Receivable
55,000
20,000
75,000
50,000
30,000
80,000
Inventory
100,000
60,000
160,000
Investment in Snoopy Co.
270,000
Land
225,000
Buildings & Equipment
270,000
100,000
325,000
700,000
200,000
Less: Accumulated Depreciation
(400,000)
(10,000)
10,000
Total Assets
1,000,000
400,000
10,000
Accounts Payable
0
10,000
890,000
(400,000)
280,000
1,130,000
75,000
25,000
100,000
Bonds Payable
200,000
75,000
275,000
Common Stock
500,000
200,000
200,000
500,000
Retained Earnings
225,000
100,000
100,000
225,000
NCI in NA of Snoopy Co.
Total Liabilities & Equity
1,000,000
400,000
c.
Peanut Co.
Consolidated Balance Sheet
1/1/20X8
Cash
Accounts Receivable
Inventory
Land
Buildings & Equipment
Less: Accumulated Depreciation
Total Assets
75,000
80,000
160,000
325,000
890,000
(400,000)
1,130,000
Accounts Payable
Bonds Payable
Common Stock
Retained Earnings
NCI in NA of Snoopy Co.
Total Liabilities & Equity
100,000
275,000
500,000
225,000
30,000
1,130,000
3-33
300,000
30,000
30,000
30,000
1,130,000
Chapter 03 - The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential
P3-35 Consolidated Worksheet at End of the First Year of Ownership (Equity Method)
a.
Equity Method Entries on Peanut Co.'s Books:
Investment in Snoopy Co.
Cash
270,000
270,000
Record the initial investment in Snoopy Co.
Investment in Snoopy Co.
Income from Snoopy Co.
67,500
67,500
Record Peanut Co.'s 90% share of Snoopy Co.'s 20X8 income
Cash
Investment in Snoopy Co.
18,000
18,000
Record Peanut Co.'s 90% share of Snoopy Co.'s 20X8 dividend
b.
Book Value Calculations:
NCI
10%
+
Peanut
Co.
90%
=
Common
Stock
+
Retained
Earnings
Original book value
+ Net Income
- Dividends
30,000
7,500
(2,000)
270,000
67,500
(18,000)
200,000
100,000
75,000
(20,000)
Ending book value
35,500
319,500
200,000
155,000
1/1/X8
12/31/X8
Goodwill = 0
Goodwill = 0
Identifiable
excess = 0
90%
Book value =
270,000
Excess = 0
$270,000
Initial
investment
in Snoopy
Co.
90%
Book value =
319,500
3-34
$319,500
Net
investment
in Snoopy
Co.
Chapter 03 - The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential
P3-35 (continued)
Basic Elimination Entry
Common stock
Retained earnings
Income from Snoopy Co.
NCI in NI of Snoopy Co.
Dividends declared
Investment in Snoopy Co.
NCI in NA of Snoopy Co.
200,000
100,000
67,500
7,500
20,000
319,500
35,500
Optional accumulated depreciation elimination entry
Accumulated depreciation
Building & equipment
10,000
10,000
Investment in
Snoopy Co.
Acquisition Price
90% Net Income
Ending Balance
Income from
Snoopy Co.
270,000
67,500
18,000
90% Dividends
319,500
Basic
319,500
0
67,500
90% Net Income
67,500
Ending Balance
67,500
0
3-35
Chapter 03 - The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential
P3-35 (continued)
Peanut
Co.
Snoopy
Co.
Elimination Entries
DR
CR
Consolidated
Income Statement
Sales
Less: COGS
Less: Depreciation Expense
Less: Other Expenses
800,000
250,000
1,050,000
(200,000)
(125,000)
(325,000)
(50,000)
(10,000)
(60,000)
(225,000)
(40,000)
(265,000)
Income from Snoopy Co.
67,500
Consolidated Net Income
392,500
NCI in Net Income
Controlling Interest in Net
Income
75,000
67,500
0
67,500
400,000
7,500
(7,500)
392,500
75,000
75,000
0
392,500
Beginning Balance
225,000
100,000
100,000
Net Income
392,500
75,000
75,000
(100,000)
(20,000)
517,500
155,000
Cash
158,000
80,000
238,000
Accounts Receivable
165,000
65,000
230,000
Inventory
200,000
75,000
Investment in Snoopy Co.
319,500
Land
200,000
100,000
Buildings & Equipment
700,000
200,000
Less: Accumulated Depreciation
(450,000)
(20,000)
10,000
Total Assets
1,292,500
500,000
10,000
75,000
60,000
Statement of Retained Earnings
Less: Dividends Declared
Ending Balance
175,000
225,000
0
392,500
20,000
(100,000)
20,000
517,500
Balance Sheet
Accounts Payable
275,000
319,500
300,000
10,000
200,000
85,000
Common Stock
500,000
200,000
200,000
Retained Earnings
517,500
155,000
175,000
3-36
500,000
(460,000)
329,500
1,473,000
285,000
NCI in NA of Snoopy Co.
1,292,500
890,000
135,000
Bonds Payable
Total Liabilities & Equity
0
375,000
500,000
20,000
517,500
35,500
35,500
55,500
1,473,000
Chapter 03 - The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential
P3-36 Consolidated Worksheet at End of the Second Year of Ownership (Equity Method)
a.
Equity Method Entries on Peanut Co.'s Books:
Investment in Snoopy Co.
Income from Snoopy Co.
72,000
72,000
Record Peanut Co.'s 90% share of Snoopy Co.'s 20X9 income
Cash
Investment in Snoopy Co.
27,000
27,000
Record Peanut Co.'s 90% share of Snoopy Co.'s 20X9 dividend
b.
Book Value Calculations:
NCI
10%
+
Peanut
Co.
90%
=
Common
Stock
+
Retained
Earnings
Beginning book value
+ Net Income
- Dividends
35,500
8,000
(3,000)
319,500
72,000
(27,000)
200,000
155,000
80,000
(30,000)
Ending book value
40,500
364,500
200,000
205,000
1/1/X9
12/31/X9
Goodwill = 0
Goodwill = 0
Excess = 0
90%
Book value =
319,500
Excess = 0
$319,500
Net
investment
in Snoopy
Co.
90%
Book value =
364,500
3-37
$364,500
Net
investment
in Snoopy
Co.
Chapter 03 - The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential
P3-36 (continued)
Basic Elimination Entry
Common stock
Retained earnings
Income from Snoopy Co.
NCI in NI of Snoopy Co.
Dividends declared
Investment in Snoopy Co.
NCI in NA of Snoopy Co.
200,000
155,000
72,000
8,000
30,000
364,500
40,500
Optional accumulated depreciation elimination entry
Accumulated depreciation
Building & equipment
10,000
10,000
Investment in
Snoopy Co.
Beginning Balance
90% Net Income
Ending Balance
Income from
Snoopy Co.
319,500
72,000
27,000
90% Dividends
364,500
Basic
364,500
0
72,000
90% Net Income
72,000
Ending Balance
72,000
0
3-38
Chapter 03 - The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential
P3-36 (continued)
Peanut
Co.
Snoopy
Co.
Elimination Entries
DR
CR
Consolidated
Income Statement
Sales
Less: COGS
Less: Depreciation Expense
Less: Other Expenses
850,000
300,000
1,150,000
(270,000)
(150,000)
(420,000)
(50,000)
(10,000)
(60,000)
(230,000)
(60,000)
(290,000)
Income from Snoopy Co.
72,000
Consolidated Net Income
372,000
NCI in Net Income
Controlling Interest in Net
Income
80,000
72,000
0
72,000
380,000
8,000
(8,000)
372,000
80,000
80,000
0
372,000
Beginning Balance
517,500
155,000
155,000
Net Income
372,000
80,000
80,000
(225,000)
(30,000)
664,500
205,000
Cash
255,000
75,000
330,000
Accounts Receivable
190,000
80,000
270,000
Inventory
180,000
100,000
Investment in Snoopy Co.
364,500
Land
200,000
100,000
Buildings & Equipment
700,000
200,000
Less: Accumulated Depreciation
(500,000)
(30,000)
10,000
Total Assets
1,389,500
525,000
10,000
75,000
35,000
Statement of Retained Earnings
Less: Dividends Declared
Ending Balance
235,000
517,500
0
372,000
30,000
(225,000)
30,000
664,500
Balance Sheet
Accounts Payable
280,000
364,500
300,000
10,000
150,000
85,000
Common Stock
500,000
200,000
200,000
Retained Earnings
664,500
205,000
235,000
3-39
525,000
(520,000)
374,500
1,550,000
235,000
NCI in NA of Snoopy Co.
1,389,500
890,000
110,000
Bonds Payable
Total Liabilities & Equity
0
435,000
500,000
30,000
664,500
40,500
40,500
70,500
1,550,000
Chapter 03 - The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential
P3-37 Consolidated Worksheet and Balance Sheet on the Acquisition Date (Equity
Method)
a.
Equity Method Entries on Paper Co.'s Books:
Investment in Scissor Co.
Cash
296,000
296,000
Record the initial investment in Scissor Co.
b.
Book Value Calculations:
+
NCI
20%
Original book value
74,000
Paper
Co.
80%
=
Common
Stock
296,000
250,000
+
Retained
Earnings
120,000
1/1/X8
Goodwill = 0
Identifiable
excess = 0
$296,000
Initial
investment
in Scissor
Co.
80%
Book value =
296,000
Basic Elimination Entry
Common stock
Retained earnings
Investment in Scissor Co.
NCI in NA of Scissor Co.
250,000
120,000
296,000
74,000
Optional accumulated depreciation elimination entry
Accumulated depreciation
Building & equipment
24,000
24,000
Investment in
Scissor Co.
Acquisition Price
296,000
296,000
Basic Entry
0
3-40
Chapter 03 - The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential
P3-37 (continued)
Paper
Co.
Scissor
Co.
Elimination Entries
DR
CR
Consolidated
Balance Sheet
Cash
Accounts Receivable
109,000
25,000
134,000
65,000
37,000
102,000
Inventory
125,000
87,000
212,000
Investment in Scissor Co.
296,000
Land
280,000
Buildings & Equipment
296,000
125,000
0
405,000
875,000
250,000
Less: Accumulated Depreciation
(500,000)
(24,000)
24,000
Total Assets
1,250,000
500,000
24,000
95,000
30,000
Bonds Payable
250,000
100,000
Common Stock
625,000
250,000
250,000
625,000
Retained Earnings
280,000
120,000
120,000
280,000
Accounts Payable
24,000
1,250,000
500,000
c.
Paper Co.
Consolidated Balance Sheet
1/1/20X8
Cash
Accounts Receivable
Inventory
Land
Buildings & Equipment
Less: Accumulated Depreciation
Total Assets
134,000
102,000
212,000
405,000
1,101,000
(500,000)
1,454,000
Accounts Payable
Bonds Payable
Common Stock
Retained Earnings
NCI in NA of Scissor Co.
Total Liabilities & Equity
125,000
350,000
625,000
280,000
74,000
1,454,000
3-41
(500,000)
320,000
1,454,000
125,000
350,000
NCI in NA of Scissor Co.
Total Liabilities & Equity
1,101,000
370,000
74,000
74,000
74,000
1,454,000
Chapter 03 - The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential
P3-38 Consolidated Worksheet at End of the First Year of Ownership (Equity Method)
a.
Equity Method Entries on Paper Co.'s Books:
Investment in Scissor Co.
Cash
296,000
296,000
Record the initial investment in Scissor Co.
Investment in Scissor Co.
Income from Scissor Co.
74,400
74,400
Record Paper Co.'s 80% share of Scissor Co.'s 20X9 income
Cash
Investment in Scissor Co.
20,000
20,000
Record Paper Co.'s 80% share of Scissor Co.'s 20X9 dividend
b.
Book Value Calculations:
NCI
20%
+
Paper
Co.
80%
=
Common
Stock
+
Retained
Earnings
Original book value
+ Net Income
- Dividends
74,000
18,600
(5,000)
296,000
74,400
(20,000)
250,000
120,000
93,000
(25,000)
Ending book value
87,600
350,400
250,000
188,000
1/1/X9
12/31/X9
Goodwill = 0
Goodwill = 0
Identifiable
excess = 0
80%
Book value =
296,000
Excess = 0
$296,000
Initial
investment
in Scissor
Co.
80%
Book value =
350,400
3-42
$350,400
Net
investment
in Scissor
Co.
Chapter 03 - The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential
P3-38 (continued)
Basic Elimination Entry
Common stock
Retained earnings
Income from Scissor Co.
NCI in NI of Scissor Co.
Dividends declared
Investment in Scissor Co.
NCI in NA of Scissor Co.
250,000
120,000
74,400
18,600
25,000
350,400
87,600
Optional accumulated depreciation elimination entry
Accumulated depreciation
Building & equipment
24,000
24,000
Investment in
Scissor Co.
Acquisition Price
80% Net Income
Ending Balance
Income from
Scissor Co.
296,000
74,400
20,000
80%
Dividends
350,400
Basic
350,400
0
74,400
80% Net Income
74,400
Ending Balance
74,400
0
3-43
Chapter 03 - The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential
P3-38 (continued)
Paper
Co.
Scissor
Co.
Elimination Entries
DR
CR
Consolidated
Income Statement
Sales
Less: COGS
Less: Depreciation Expense
Less: Other Expenses
800,000
310,000
1,110,000
(250,000)
(155,000)
(405,000)
(65,000)
(12,000)
(77,000)
(280,000)
(50,000)
(330,000)
Income from Scissor Co.
74,400
Consolidated Net Income
279,400
NCI in Net Income
Controlling Interest in Net
Income
93,000
74,400
0
74,400
298,000
18,600
(18,600)
279,400
93,000
93,000
280,000
120,000
120,000
93,000
0
279,400
Statement of Retained Earnings
Beginning Balance
280,000
Net Income
279,400
93,000
Less: Dividends Declared
(80,000)
(25,000)
Ending Balance
479,400
188,000
Cash
191,000
46,000
237,000
Accounts Receivable
140,000
60,000
200,000
Inventory
190,000
120,000
310,000
Investment in Scissor Co.
350,400
Land
250,000
125,000
Buildings & Equipment
875,000
250,000
Less: Accumulated Depreciation
(565,000)
(36,000)
24,000
Total Assets
1,431,400
565,000
24,000
77,000
27,000
104,000
Bonds Payable
250,000
100,000
350,000
Common Stock
625,000
250,000
250,000
Retained Earnings
479,400
188,000
213,000
213,000
0
279,400
25,000
(80,000)
25,000
479,400
Balance Sheet
Accounts Payable
350,400
24,000
NCI in NA of Scissor Co.
Total Liabilities & Equity
1,431,400
3-44
565,000
0
375,000
463,000
1,101,000
(577,000)
374,400
1,646,000
625,000
25,000
479,400
87,600
87,600
112,600
1,646,000
Chapter 03 - The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential
P3-39 Consolidated Worksheet at End of the Second Year of Ownership (Equity Method)
a.
Equity Method Entries on Paper Co.'s Books:
Investment in Scissor Co.
Income from Scissor Co.
85,600
85,600
Record Paper Co.'s 80% share of Scissor Co.'s 20X9 income
Cash
Investment in Scissor Co.
24,000
24,000
Record Paper Co.'s 80% share of Scissor Co.'s 20X9 dividend
b.
Book Value Calculations:
NCI
20%
Beginning book value
+ Net Income
- Dividends
Ending book value
+
Paper
Co.
80%
=
Common
Stock
+
87,600
21,400
(6,000)
350,400
85,600
(24,000)
250,000
188,000
107,000
(30,000)
103,000
412,000
250,000
265,000
1/1/X9
12/31/X9
Goodwill = 0
Goodwill = 0
Excess = 0
80%
Book value =
350,400
Retained
Earnings
Excess = 0
$350,400
Net
investment
in Scissor
Co.
80%
Book value =
412,000
3-45
$412,000
Net
investment
in Scissor
Co.
Chapter 03 - The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential
P3-39 (continued)
Basic Elimination Entry
Common stock
Retained earnings
Income from Scissor Co.
NCI in NI of Scissor Co.
Dividends declared
Investment in Scissor Co.
NCI in NA of Scissor Co.
250,000
188,000
85,600
21,400
30,000
412,000
103,000
Optional accumulated depreciation elimination entry
Accumulated depreciation
Building & equipment
24,000
24,000
Investment in
Scissor Co.
Beginning Balance
80% Net Income
350,400
85,600
24,000
Ending Balance
Income from
Scissor Co.
80% Net Income
85,600
Ending Balance
80% Dividends
412,000
412,000
85,600
Basic
0
85,600
0
3-46
Chapter 03 - The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential
P3-39 (continued)
Paper
Co.
Scissor
Co.
Elimination Entries
DR
CR
Consolidated
Income Statement
Sales
Less: COGS
Less: Depreciation Expense
Less: Other Expenses
880,000
355,000
1,235,000
(278,000)
(178,000)
(456,000)
(65,000)
(12,000)
(77,000)
(312,000)
(58,000)
(370,000)
Income from Scissor Co.
85,600
Consolidated Net Income
310,600
NCI in Net Income
Controlling Interest in Net
Income
107,000
85,600
0
85,600
332,000
21,400
(21,400)
310,600
107,000
107,000
0
310,600
Beginning Balance
479,400
188,000
188,000
Net Income
310,600
107,000
107,000
Less: Dividends Declared
(90,000)
(30,000)
Ending Balance
700,000
265,000
Cash
295,000
116,000
411,000
Accounts Receivable
165,000
97,000
262,000
Inventory
193,000
115,000
308,000
Investment in Scissor Co.
412,000
Land
250,000
125,000
Buildings & Equipment
875,000
250,000
Less: Accumulated Depreciation
(630,000)
(48,000)
24,000
Total Assets
1,560,000
655,000
24,000
85,000
40,000
125,000
Bonds Payable
150,000
100,000
250,000
Common Stock
625,000
250,000
250,000
Retained Earnings
700,000
265,000
295,000
Statement of Retained Earnings
295,000
479,400
0
310,600
30,000
(90,000)
30,000
700,000
Balance Sheet
Accounts Payable
412,000
24,000
NCI in NA of Scissor Co.
Total Liabilities & Equity
1,560,000
3-47
655,000
0
375,000
545,000
1,101,000
(654,000)
436,000
1,803,000
625,000
30,000
700,000
103,000
103,000
133,000
1,803,000